Multimedia Marketing/Marketing.iso/market/chapter8.6p

Text File | 1996-08-22 | 17KB | 342 lines

SECTION 8.6  Other Demand Based Pricing Strategies

INSTRUCTIONS Think about if there are ways of considering demand, when making
pricing decisions, that differ from those covered in the last section.

EXAMPLE

A retail nursery located in the southwest caters to upper-income
consumers. Its premises are located on an attractive lot just outside
of the city limits of a city of about 80,000. The physical facilities
are expensive and immaculately clean and the employees are very
customer oriented. Some very rare plants and trees are sold.

This firm charges prices that are higher than any other nursery
in the community. Management feels that this is proper, given that
customers receive more than those who patronize other dealers.
Consumers feel that visiting and buying in the store is well worth
the price differential, since they are getting a bundle of
satisfactions that is superior to all others.

DETAILS

How would consumers perceive sophisticated 35 mm cameras if they
sold at a lower price than disposable cameras? Or if mink coats
sold off the rack at a discount store for ,99.95?

Many studies indicate that buyer perceptions of quality and
prestige are often proportional to the item's price. For most
products, even aspirins, there are prestige, high-quality market
segments made up of buyers who expect to pay more for "the best".

When consumers experience difficulty in objectively assessing a
product's quality, many use high price as a signal of quality and
prestige. "Prestige pricing", which involves charging a premium
price for a product or service, is a strategy designed to capitalize
on these perceptions. Some consumers have a strong conviction that
"You get what you pay for".

Traditional economic theory predicted that, as companies lowered
their prices, they would sell more units. That idea holds true for
many goods and services. Prestige items bring about the opposite
behavior, however. Price reductions signal that the offerings must
be less desirable.

Marketers seeking to penetrate high prestige/quality market segments
should be aware that many buyers expect relatively high prices.
A furniture store chain, for example increased its demand by marketing
higher priced furniture than it once did. This does not mean that
nonprice elements of the marketing mix are unimportant. An item's
actual quality must at least meet buyer expectations. Besides
increasing its price, the furniture chain also began to carry
merchandise with better materials and workmanship. Similarly,
other marketing mix elements such as promotion should be blended
with the price mix to augment a high-quality/prestige element.
These might include a distinctive package and distribution channels
with upscale retailers.

Sometimes even personal mannerisms of sales representatives can assist
in conveying a quality image. An exclusive retail men's wear chain,
for instance, trains its salespeople to handle the merchandise as
if it was fragile china in the presence of store customers. If
salespeople treat the product with respect, this is likely to rub
off on target consumers.

PROBLEM 1

A golf club producer uses prestige pricing. It is likely that consumers
will pay more for the clubs because:

A. They experience difficulty in objectively assessing their quality.
B. They are motivated primarily by subconscious forces.
C. They have considerable experience in evaluating golf club quality.
D. They are guided into buying expensive clubs because of reference
   group pressures.

WORKED

A golf club producer uses prestige pricing as it is likely that
consumers will pay more for the clubs because they experience difficulty in
in objectively assessing their quality. For most golfers, with the
possible exception of the pros, it is not easy to evaluate how well
a club will work. One can grip the club, take practice swings, handle
it, etc., but this does not provide a very extensive test. Even
trying out these products is not a completely objective assessment
method, because there are many variables (the course, the golf balls,
the grip, the swing, and others) that can determine how well the
play goes on any given day. Hence, prestige oriented buyers use price
as a substitute measure for quality.

ANSWER  A
INSTRUCTIONS Think about if there are ways of considering demand, when making
pricing decisions, that differ from those covered in the last section.

EXAMPLE

A retail nursery located in the southwest caters to upper-income
consumers. Its premises are located on an attractive lot just outside
of the city limits of a city of about 80,000. The physical facilities
are expensive and immaculately clean and the employees are very
customer oriented. Some very rare plants and trees are sold.

This firm charges prices that are higher than any other nursery
in the community. Management feels that this is proper, given that
customers receive more than those who patronize other dealers.
Consumers feel that visiting and buying in the store is well worth
the price differential, since they are getting a bundle of
satisfactions that is superior to all others.

DETAILS

"Leader pricing" is a  traditional practice that is becoming more popular
at retail. Increasingly, consumers are looking for bargains. They
have learned that they can often obtain these if they are willing
to compare stores and to wait for discounts.

Frequently, retailers sell products at low prices simply to build
store traffic. For example, supermarkets feature special rates
on milk, coffee, hamburger, and other often-purchased staples in order
to attract customers. Once in the store, shoppers are likely to buy
additional items at normal prices and margins. "Leader prices" are
below those of competitors and yield less than normal markup
percentages. On the other hand, "loss leader" prices are below cost.

Leader and loss leader pricing often makes considerable sense at
the retail level. In some industries, consumers make many of their
purchases on impulse. It is estimated by some industry experts that
approximately three fourths of grocery purchases are made on impulse.
If retailers can get consumers into the store with leaders, they
know that they have accomplished an important objective.

Leader pricing is not restricted to the grocery industry. In fact,
it is found in most types of retailing. Particularly frequent users
of this strategy are drug, furniture, hardware, and clothing stores.
Even some stores that maintain prestige prices and attempt to build
an upscale image may use leader pricing. From time to time, some
banks engage in this practice. They may offer low priced check
cashing, low ATM charges, or other reductions to attract customers
who will pay full price for other services.

PROBLEM 2

A supermarket frequently uses leader pricing for its hamburger.
What is the logical reason for this strategy?

A. The supermarket will sell more hamburger since demand for this
   product is elastic.
B. This will be of value in interesting more consumers to buy their
   hamburger in the store, rather than in fast food hamburger chain
   stores.
C. This can build store traffic and pave the way for consumer purchases
   of items that are not leaders.
D. The supermarket will build an image as a store where bargains are
   available.

WORKED

A supermarket frequently uses leader pricing for its hamburger.
The logical reason for this strategy is to build store traffic and
pave the way for consumer purchases of items that are not leaders.
Many consumers buy hamburger and it is a mainstay in the diets of
numerous individuals and families. Further, knowledge of hamburger
prices, from store to store, is fairly extensive. If the supermarket
offers attractive prices, this will induce consumers into the store.
Some will buy goods at the deli (the most profitable part of most
stores). Others will buy non-foods, such as shampoo and cosmetics
(the second most profitable part). And consumers will purchase food
products, in addition to hamburger. Supermarket margins are very low
so they are very dependent on high inventory turnover. And this is
only possible with high store traffic.

ANSWER C

INSTRUCTIONS Think about if there are ways of considering demand, when making
pricing decisions, that differ from those covered in the last section.

EXAMPLE

A retail nursery located in the southwest caters to upper-income
consumers. Its premises are located on an attractive lot just outside
of the city limits of a city of about 80,000. The physical facilities
are expensive and immaculately clean and the employees are very
customer oriented. Some very rare plants and trees are sold.

This firm charges prices that are higher than any other nursery
in the community. Management feels that this is proper, given that
customers receive more than those who patronize other dealers.
Consumers feel that visiting and buying in the store is well worth
the price differential, since they are getting a bundle of
satisfactions that is superior to all others.

DETAILS

A possible problem with leader pricing is that some consumers will
enter the store, buy only the marked-down merchandise, and leave,
without buying anything else. These rational individuals are very
much in the minority, however. Most consumers are not willing to
expend that much time and energy in shopping--for convenience sake
and perhaps because of store loyalty-- they make all or most of their
purchases in one store.

Even very rational consumers who plan to buy only the discounted
items often find that their plans go astray. They enter the store
and walk past attractive displays that are designed specifically
to catch their interest. Many end up purchasing items that they
did not plan to, prior to entering the store.

Some marketers also use leaders and loss leaders to gain entry
to industrial goods buyers. Once on their approved buying lists, a
seller may be able to obtain other orders with higher unit profits.
However, industrial goods buyers are apt to simply place orders
on loss leaders and purchase other items from regular suppliers.
Therefore, the use of leaders and loss leaders in industrial markets
is quite limited.

Leaders serve little useful purpose for items sold to governmental
agencies. Government agency buyers seldom hold allegiances for
past favors at special prices. Consequently, marketers typically
view each governmental agency purchase as a completely separate
transaction where an acceptable profit is necessary.

Leader pricing is not appropriate in some industries where consumers
are very concerned with getting the best service and only secondarily
with price. It is doubtful that a cancer clinic could benefit much
from this practice, for example. Most consumers want a premium
service. If they are covered by medical insurance, pricing is even
less important to most.

PROBLEM 3

A plumbing supplies wholesale distributor is considering the use of
leader pricing. A reason why this may not be a good idea is:

A. Many buyers will develop the impression that the goods with leader
   prices are of low quality.
B. Many buyers will not place wholesalers who use leader pricing
   on their approved buying lists.
C. Many buyers will place orders on leaders and buy other items
   from other suppliers.
D. In the plumbing supplies industry, buyers place more emphasis
   on loyalty to particular vendors than they do to prices.

WORKED

A plumbing supplies wholesale distributor is considering the use
of leader pricing. A reason why this may not be a good idea is
that many buyers will place orders on leaders and buy other
items from other suppliers. Industrial buyers are essentially
rational decision makers. They attempt to acquire appropriate
quality goods, useful services, favorable terms of sale, all at
reasonable prices. They are not likely to purchase goods and
services on impulse or because a supplier has previously given
them a low price for other goods and services. These buyers
evaluate each individual purchase and attempt to do the best
job possible of acquiring needed goods and services at a reasonable
price, irrespective of the prices charged on previous purchases.
Leader pricing probably will not be acceptable in this instance.

ANSWER  C
INSTRUCTIONS Think about if there are ways of considering demand, when making
pricing decisions, that differ from those covered in the last section.

EXAMPLE

A retail nursery located in the southwest caters to upper-income
consumers. Its premises are located on an attractive lot just outside
of the city limits of a city of about 80,000. The physical facilities
are expensive and immaculately clean and the employees are very
customer oriented. Some very rare plants and trees are sold.

This firm charges prices that are higher than any other nursery
in the community. Management feels that this is proper, given that
customers receive more than those who patronize other dealers.
Consumers feel that visiting and buying in the store is well worth
the price differential, since they are getting a bundle of
satisfactions that is superior to all others.

DETAILS

Most marketers set prices to end with an odd number, such as 99
cents or ,7.95. For items priced below fifty dollars, it is customary
to set prices at one cent, five cents, or seven cents below an
even dollar figure. ,7.99, ,7.95, and ,7.93 are such prices. For
items above fifty dollars, common practice is to set the price at
one dollar or two dollars below an even dollar amount, such as
seventy eight or seventy nine dollars.

Merchants first began such practices many years ago to force clerks
to register sales instead of pocketing receipts. "Odd-number prices"
required making change, meaning that clerks would need to ring sales
on a cash register to gain access to the change drawer. Sales taxes
in almost all states today accomplish the same purpose (one dollar
plus six cents sales tax), yet the practice continues.

Apparently, many marketers feel that odd-number pricing is effective
in inducing sales. Perhaps buyers feel that there are price thresholds.
Perhaps they perceive seventy-nine cents as being significantly less
than eighty cents because it is in the seventies range. At any rate,
odd-number pricing is in widespread use if for no other reason than
custom.

A number of researchers have conducted studies to determine if
consumers buy more when odd number, rather than even number pricing
is used. The studies do not show that consumers do buy more. However,
many marketers believe in the practice because it seems to be logical.
In all probability they will continue to use it, regardless of what
the researchers say.

Many firms use two or more methods simultaneously to set their
prices. For example, a retailer might use markup pricing for all
items but then adjust the calculated prices to reflect competitor
actions. The retailer might further adjust specific prices to
attain customery odd-number amounts. Similarly, management may
adjust prices to reflect the product's stage in the product life
cycle. Most important, management should set prices to coordinate
with the company's overall marketing strategy.

PROBLEM 4

A retail grocer employs odd-number pricing. The reason for this is:

A. Studies have shown that odd-number pricing leads more consumers
   to buy products and services than does even-number pricing.
B. Studies have shown that odd-number pricing produces a  better
   cash flow than does even-number pricing.
C. Odd-number pricing is likely to increase merchandise turnover,
   because it reduces grocers" margins.
D. The grocer apparently feels that there are price thresholds in
   the demand for groceries.

WORKED

A retail grocer employs odd-number pricing, probably in the belief
that there are price thresholds in the demand for groceries. A
number of marketing research studies have concluded that odd-number
pricing does not necessarily produce better results than even-number
pricing, as measured by sales, profits, and other criteria. However,
many practicing marketers have a "gut feeling" that consumers respond
more favorably to odd numbers. This being the case, the practice is
very widespread in virtually every industry.

ANSWER  D